Electro Optic Systems Holdings Ltd (ASX: EOS) shares started the week with a bang on Monday.
But don't worry if you missed out on those strong gains, because one leading broker believes there's plenty more to come for this ASX All Ords stock.
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Broker tips ASX All Ords stock to rocket
According to a note out of Bell Potter, it believes the defence and space systems company's shares are undervalued at present.
Particularly following the announcement of the sale of its Naval Satellite Communications subsidiary, EM Solutions, to Cohort plc last week.
The two parties agreed on an enterprise value of $144 million, subject to customary adjustments. FIRB approval has already been obtained by Cohort. This means that completion is expected within six months.
Commenting on the deal, the broker said:
Whilst EM Solutions is a well performing business for EOS, it is ultimately non-core to the central business and its sale significantly strengthens the company's financial position. Completion of the transaction triggers the repayment of EOS's outstanding debt to WHSP ($64.4m) so post transaction we anticipate the company will have a cash balance >$100m, with no debt, and will be well placed to support future growth of the core business.
Big returns
In response to the update, the broker has reaffirmed its buy rating and $2.20 price target on the ASX All Ords stock.
Based on its current share price of $1.34, this implies potential upside of approximately 64% for investors over the next 12 months.
To put that into context, a $2,000 investment would turn into almost $3,300 by this time next year. That's if Bell Potter is accurate with its recommendation.
As mentioned at the top, Bell Potter believes the market is undervaluing the stock at present. It concludes:
We await further details regarding the subsequent impact on earnings and timing of transaction completion before updating our forecasts and valuation. However, we view this as a positive development for EOS, which highlights the potential upside to its current valuation.
Based on its current market cap, EOS would have an EV of <$100m following completion of the transaction, which clearly undervalues the company when you consider the company had net contracts receivable of $43m and $64.2m of cash deposits held with banks to support bank guarantees (not included in the cash balance) at 30-Sept-24. Whilst risks remain around further orderbook growth, the company has several material near-term sales opportunities and its strengthened financial position removes any funding constraints as it works through this process.
